At the same time, the company showed significant financial losses throughout 2016 due to a decrease in income in its main business - MTPL. Thus, for the nine months of 2016, its net loss according to RAS amounted to 4.3 billion rubles, and according to IFRS for the first half of the year it was 8.65 billion rubles. Due to the instability of income, on December 12, the rating agency S&P put the ratings of Rosgosstrakh under review with a negative outlook. Meanwhile, a source close to the deal notes that in mid-December the State Duma adopted in the first reading amendments to the law on compulsory motor liability insurance, which should help stabilize the situation in this segment of the insurance business.
Rosgosstrakh, due to high losses in compulsory motor liability insurance, began to reduce its share in the segment last year. Thus, as of March 31, 2015, it was 37.7%, and as of June 30, 2015 - 34.8%. As of September 30, 2016, the share of Rosgosstrakh in the MTPL market decreased to 24.4%. The company began to reduce its share after, from the end of May to the beginning of June 2015, the Central Bank limited the validity of Rosgosstrakh’s license for the implementation of compulsory motor liability insurance due to violations in the application of the reduction factor (bonus-malus) when calculating the insurance premium.
The main beneficiary of the RGS insurance group is Danil Khachaturov, who owns the main assets of the group, PJSC Rosgosstrakh, RGS Bank, IC RGS Investments through the structure of Cyprus offshore companies - RGS Holdings Ltd, RGS Asseets LTD, RGS Company Ltd.
According to Rosgosstrakh materials, 50.46% of its shares belong to PJSC RGS Holding, 10.5% to RGS Assets, 6.7% to Savings Management, which is the trustee of pension savings of NPF RGS.
The main beneficiary of RGS Bank, according to reporting on the Central Bank website, is Sergei Khachaturov, who, through Cypriot offshore companies, controls almost 75% of its shares together with his partners.
On December 19, during the day, there were no comments from the parties on one of the largest transactions on the market. Thus, the key parameters of the deal - the amount, the share that Khachaturov will receive in Otkritie, the timing and stages - remain unknown. Experts do not rule out that the deal may be forced for Rosgosstrakh, which is in difficult financial situation. According to Promsvyazbank analyst Dmitry Monastyrshin, the merger with Otkritie is a way for Rosgosstrakh to improve its financial condition. “In part, this can be called a type of private financial recovery,” he points out. Monastyrshin believes that among the private players (state banks have repeatedly reported that they are not interested in recovery projects), Otkritie is “the only one who is able to digest this business, taking into account the fact that Rosgosstrakh is in a loss-making state.” According to RBC, Otkritie was the only contender for the company's assets.
In the absence of official comments about the deal from Otkritie and Rosgosstrakh, experts find it difficult to assess in detail its impact on the participants. “To evaluate, you need to know how the deal will be structured,” adds Moody’s analyst Petr Palkin. “We need to understand how the process of business consolidation will take place,” S&P believes. “Rosgosstrakh is a fairly large asset, so this process may take time,” says S&P analyst Ekaterina Tolstova. “We estimate the announced additional issue in the amount of 46 billion rubles. as significant given the current situation in compulsory motor liability insurance (which can improve capitalization indicators), but it is necessary to take into account other factors, such as the level of unprofitability and the amount of liquid funds of the insurance company,” says Tolstova.
The managing director of the National Rating Agency (NRA) Pavel Samiev calls the unprofitability of Rosgosstrakh in the OSAGO segment the main risk. “The situation with compulsory motor third party liability insurance is hardly predictable for the entire market. And this is the main risk for the buyer,” says Samiev. “In addition, we should not forget about the risks of the integration process as such: they are quite large, because both management and the management system are combined. In such a situation, it will be important how much we can maintain the customer base,” adds Nordea Bank analyst Dmitry Fedenkov. He notes that very few mergers and acquisitions in the Russian financial market have led to a noticeable synergistic effect and had a positive impact on the results of their participants.
Quotes of Rosgosstrakh shares on the Moscow Exchange decreased slightly during the day. However, compared to yesterday’s closing level, shares rose in price by 0.5%, to 0.4 rubles.
Financial assistance in solving the problems of Rosgosstrakh insurance company put the Otkritie FC group in a dangerous position even before the official purchase of the insurance organization. First Deputy Chairman of the Central Bank of the Russian Federation Dmitry Tulin told reporters about this. According to him, FC Otkritie Bank actually began financing the current activities of Rosgosstrakh at the end of last year.
The decision of the owners of FC Otkritie to buy Rosgosstrakh became known in December 2016.
“The company was experiencing certain financial difficulties at that time, so it was a convenient target for takeover. De facto, the bank began to finance its activities by providing loans. The bank's actual costs for financing these activities far exceeded the initial expectations of the group's owners; the bank spent a fair amount of liquidity for these purposes, although this was not a fatal step for it. The problem was that they solved the financial problems of Rosgosstrakh, but they put themselves in a very vulnerable position,” TASS quotes D. Tulin as saying.
The Central Bank representative added that, although the financing of Rosgosstrakh was not the only reason for the bank’s current catastrophic situation, it became a kind of trigger that “served as a catalyst for the process and brought this event closer.”
Let us recall that on August 29, 2017, the Bank of Russia decided to sanitize FC Otkritie. A temporary administration has been appointed to the credit institution, which includes employees of the Central Bank of the Russian Federation and UK FCBS LLC, as reported on the regulator’s website. From the press release of the Central Bank it became known that PJSC IC Rosgosstrakh is part of the bank group, where a temporary administration has now been appointed.
At the end of the first half of 2017, the loss of Rosgosstrakh amounted to 20.9 billion rubles, which is 52% higher than the same figure in 2016. At the end of last year, the insurance organization recorded a loss of 33.3 billion rubles. According to the forecast of the rating agency S&P Global Ratings, Rosgosstrakh will also face losses based on the results of 2017. The company’s further “financial prospects remain uncertain.” According to calculations by agency experts, Otkritie FC financed the insurer with at least 40 billion rubles.
“Financial organizations and specialized services included in the Bank group, including PJSC Insurance Company Rosgosstrakh, PJSC National Bank TRUST, PJSC Rosgosstrakh Bank, JSC NPF Lukoil-Garant, JSC NPF Elektroenergetiki, OJSC “NSF “RGS”, JSC “Otkritie Broker”, as well as “Tochka” and Rocketbank will continue to operate as normal and serve clients,” the Bank of Russia said in a press release.
FYI
FC Otkritie Bank, founded in 1992, is a systemically important credit institution and ranks eighth in terms of assets. The bank's infrastructure includes 22 branches and more than 400 internal structural divisions.
The purchase of the Rosgosstrakh company by FC Otkrytie bank ultimately brought down the financial corporation itself, forcing its owner to hastily leave the country. As a ricochet, this operation brought Boris Mints, who had invested money in Otkrytie and is now actively preparing to flee to Malta, to the brink of bankruptcy. Finally, the Ministry of Internal Affairs (MVD) itself has come to its senses, which cannot understand why a previously successful insurance organization suddenly turned out to be completely bankrupt, and its assets were turned into real estate by Danil Khachaturov and transferred abroad. The fact that the Ministry of Internal Affairs has applied to the Central Bank with a request to check the activities of Rosgosstrakh was announced on Thursday by the deputy chairman of the Central Bank, Vladimir Chistyukhin. The regulator is currently looking into this issue.
At Otkritie Bank, which now owns Rosgosstrakh, there was a temporary administration for a long time, which looked at all the business processes of the insurer, he said: “We must decide for ourselves whether there is a need to discuss with colleagues from the Ministry of Internal Affairs, whether there is a need carry out verification or you can simply use all the documents and knowledge that the Central Bank has today” (quote from RNS).
Currently, the legislation does not provide for the format of joint inspections, Chistyukhin noted. “Verification is only a tool; you need to get some facts. It’s not a fact that this requires verification.” “Otkritie Financial Group works closely with law enforcement agencies, including the Ministry of Internal Affairs, in a number of areas. We do not have information about the reason for the Ministry of Internal Affairs’ appeal to the Bank of Russia to inspect Rosgosstrakh,” said a representative of FC Otkritie.
Theft in Rosgosstrakh
In December 2017, Mikhail Zadornov, who headed FC Otkritie and the board of directors of Rosgosstrakh earlier this year, criticized the work of the former management of the insurer in an interview with Kommersant. In his opinion, theft reigned “from top to bottom” at Rosgosstrakh, and with a unique position in the market, he managed “to do absolutely nothing in the name of the owners and management for ten years.”
Former co-owner and president of the Rosgosstrakh group, Danil Khachaturov, responded to accusations of theft in an interview with Vedomosti. According to him, people from this same “team of incompetents” today also head insurance departments at the Central Bank, Sberbank and VTB. “The company didn’t have a single penny borrowed! And to steal from yourself, you can come up with a much simpler way than spending 15 years of your life and hundreds of billions of rubles in investments to build a company that is a market leader in all types of insurance,” Khachaturov noted.
Rosgosstrakh ceased to be profitable in 2015, when the company’s loss amounted to 5 billion rubles and has only increased since then. For nine months of 2017 (there have been no reports for the year yet), the insurer’s loss amounted to 35.3 billion rubles, which is 60% higher than the same figure last year (22 billion rubles). Rosgosstrakh plans to get out of losses in 2018. To do this, he will close some offices and will not restore his share in the MTPL market.
According to the Ruspres agency, IC Rosgosstrakh and the management company (MC) Management Consulting are minority shareholders of the Federal Group "Future", which unites non-state pension funds (NPF) of Boris Mints. These two companies nominated their candidate for election to the board of directors at the extraordinary meeting of shareholders of FG Future, but he was not included in the voting list because the deadline for submitting a proposal for a candidacy was not met.
FC Otkritie Bank has begun preparations for a merger with Rosgosstrakh, having received the right to dispose of almost 20% of the insurer's shares. This was done through the pledge of the latter’s shares as part of a repo transaction. Such an unconventional approach to structuring a deal can result in benefits for both parties, experts point out.
FC Otkritie Bank reported that on March 30 it increased its share in the authorized capital of Rosgosstrakh from 4.4 to 19.8%. The package was received by the bank as part of a repo transaction, the message stated. That is, the shares of Rosgosstrakh are pledged against a loan received by the insurer from FC Otkritie. The loan amount was not disclosed in the message.
RBC refused to clarify the details of the deal at Otkritie. Rosgosstrakh advised to contact Otkritie for comments.
These are the first public actions taken by FC Otkritie after it became known in December 2016 about the bank’s impending merger with Rosgosstrakh and its subsidiary Rosgosstrakh Bank.
Then several sources in financial circles reported this to RBC. The merger was planned for 2017. According to the calculations of the participants in the transaction, the merger will create Russia's largest private financial group with assets more than 4 trillion rubles. and a customer base of 50 million people. It was assumed that in exchange for insurance and other assets, the ultimate beneficiary of Rosgosstrakh, Danil Khachaturov, would receive a minority stake in Otkritie. Its size will depend on the results of the assessment of the businessman’s assets, RBC’s interlocutors said then.
Officially, the parties commented on the deal extremely sparingly. Market participants in their comments then did not rule out that the transaction could be forced for Rosgosstrakh, which is in a difficult financial situation due to the unprofitability of the OSAGO segment, where Rosgosstrakh is the largest player.
Precedent transaction
Experts interviewed by RBC call the structuring of a merger in the form of a repo transaction a “precedent transaction”, since the standard combination of businesses is carried out through direct entry into capital.
In this case, the repo mechanism was used, in which securities are sold and at the same time an agreement is concluded to repurchase them at a pre-agreed price. However, if a reverse transaction does not occur, the shares remain with the lender.
In the absence of comments from the parties to the transaction, experts interviewed by RBC made a number of assumptions about its form and essence.
Pros for Rosgosstrakh
The repo transaction with FC Otkritie makes it possible to partially improve the financial position of the insurer, allowing it to quickly raise the necessary funds, a source close to one of the parties to the transaction clarified. Last year, insurers faced the maximum level of payments under compulsory motor liability insurance, according to data from the Russian Union of Auto Insurers (RUA). Thus, Rosgosstrakh received 54.67 billion rubles. insurance premiums, and paid 68.85 billion rubles. As a result, the excess of payments over the premium amounted to RUB 14.2 billion.
Otkrytie probably provided assistance to Rosgosstrakh in the context of ongoing negotiations on the format of the merger. In particular, the Bank of Russia’s position on this large-scale transaction has not yet been publicly determined,” says Oleg Vyugin, a member of the board of directors of B&N Bank.
NRA Managing Director Pavel Samiev believes that Rosgosstrakh may not have enough funds to meet the new capital adequacy requirements for insurers, which came into force on April 1. “The financing allocated as part of the repo transaction allows them to be contributed to the shareholder’s capital, secured by their shares,” he believes.
Benefits for FC Otkritie
“For FC Otkritie itself, this repo transaction may be interesting for several reasons. Firstly, since the shares of Rosgosstrakh are pledged and not owned by Otkritie, this does not burden its capital. While direct ownership of shares and shares of subsidiaries, according to the requirements of the Central Bank, reduces own funds banks,” says FBK vice-president Alexey Terekhov.
For FC Otkritie Bank, its own financial position is important. At the end of December last year, the rating agency Standard & Poor's placed the ratings of Otkritie Bank under review with the possibility of reduction. The agency noted that the financial profile of the holding could worsen, including due to the holding's possible purchase of the insurance company Rosgosstrakh and the protracted the process of obtaining additional financing for the rehabilitation of Trust Bank.
Moody's Junior Vice President Petr Paklin also agrees that the repo mechanism could have been chosen due to the fact that, from the point of view of capital consumption, a repo transaction has less burden. “Repo is a convenient and flexible instrument that consumes less capital compared with a conventional loan, and there is no transfer of ownership of the pledged asset,” he points out.
In addition, Alexey Terekhov continues, the shares of Rosgosstrakh are pledged under a repo transaction with voting rights on them; accordingly, Otkritie can use them to begin implementing its own strategy and tactics in Rosgosstrakh and participate in the management of the insurer. By providing loan funds to Rosgosstrakh, FC Otkritie Bank may have received a certain trump card in further negotiations, Oleg Vyugin also points out: “Look, we supported you, but we can win it back.”
“In my opinion, structuring a merger in the form of a repo transaction is a form of protection against risks in order to be able to return everything to its original state at any time,” notes Maxim Solntsev, chairman of the board of SDM Bank.
Bypassing approval
Market participants pay special attention to the size of the stake in Rosgosstrakh pledged to FC Otkritie under a repo transaction. It is less than 20%.
Obtaining a larger block of shares, according to the requirements of the Bank of Russia, would require mandatory notification to the regulator. Obtaining less than 20% of the shares significantly reduces the time spent on the transaction and simplifies its implementation. “After all, the regulator may impose restrictions on the actions of FC Otkritie Bank, in particular due to the fact that it is carrying out the rehabilitation of Trust Bank,” points out Maxim Solntsev.
The Central Bank declined to comment, citing the fact that they do not comment on existing banks and companies.
However, sooner or later one of the largest transactions on the market will have to be approved by the regulator. The right to dispose of 19.8% of Rosgosstrakh shares received by Otkritie Bank may be a preparatory stage as part of a larger transaction that requires approval from the Central Bank, points out Pyotr Paklin.
Marina BOZHKO, Ekaterina LITOVA
The Otkritie and Rosgosstrakh groups have agreed to merge, three sources familiar with the progress of the upcoming transaction told Gazeta.Ru. The parties plan to carry out legal procedures related to the merger in 2017, and the integration will begin to have a real impact on business in 2018.
As a result of the merger, the main assets of the combined group are the Otkritie banking business, insurance company Rosgosstrakh and - will be controlled by Otkritie Holding. At the same time, it is planned to maintain both brands, notes one of the sources. “This is a logical decision. Has a very strong position in insurance market, while Otkrytie has banking and investment,” noted Gazeta.Ru’s interlocutor.
“The joint group will be among the leaders of the Russian financial market on a number of indicators, including the size of the business, customer base and infrastructure,” says an investment banker familiar with the details of the project about the preliminary assessment of the combined business.
The assets of the combined group will exceed 4 trillion rubles, the number of clients will be 50 million people. The regional network will consist of about 4 thousand points of sale, and the number of employees will be about 100 thousand.
Another important result of the merger is increased efficiency and reduced costs.
Representatives of Otkritie and Rosgosstrakh declined to comment on Sunday.
In early December, Gazeta.Ru sources spoke about a possible change of ownership at Rosgosstrakh, noting that the new owner of the company would be one of the largest Russian private banks.
Then Rosgosstrakh stated that this information was not true.
The main shareholder of Otkritie Holding is its founder (28.61%), the IFD-Kapital group (19.9%), the bank (9.99%), shareholders of the ICT group (9.82%), (7 .96%) and (6.67%). According to open sources, 52% of the shares of Rosgosstrakh belong to RGS Holding, 10.5% to RGS Assets, 6.7% to Savings Management (trustee of pension savings of NPFs), 5.33% to Aton”, no more than 5% belongs to VTB.
Otkritie tried to develop the insurance business since 2011, but subsequently decided to leave it, selling Otkritie Life Insurance to a subsidiary of RGS, Rosgosstrakh Life, in September 2016. In 2015, the group sold the universal insurer Otkritie Insurance to the structures of Alexander Kondratenkov, head of the Opora Rossii insurance commission (head of the Opora Rossii insurance commission), after which it was renamed Opora.
The exact distribution of shares in the new combined group will be determined after bilateral due diligence.
“While the parties have reached a top-level agreement on the merger, negotiations are ahead on specific conditions, so it is too early to talk about details. We can say with absolute certainty that Vadim Belyaev will remain the main shareholder of Otkritie Holding, and within the framework of the merger he will own a minority stake in the company,” says the source. According to him, there will be no other significant changes in the shareholder structure of Otkritie.
Otkritie and Rosgosstrakh expect to obtain many synergies when merging, a source close to one of the parties tells Gazeta.Ru. For example, Rosgosstrakh has a very large customer base, this information is useful for Otkritie’s retail banking business. In turn, Rosgosstrakh gets access to Otkritie’s digital developments - over the past two years, the holding has become one of the leaders in the field of remote services, launching the Tochka project and purchasing Rocketbank. The use of innovative services, taking into account the size of Rosgosstrakh’s client base and its geographic distribution, can have a significant effect, including in the form of savings, says an investment banker familiar with the project.
He also notes that the financial results of Rosgosstrakh will not be an obstacle to the merger. The company's net loss in the first half of the year amounted to 8.6 billion rubles. (about $140 million), which is two times higher than in 2015, notes S&P in comments. “This result is due to the peculiarities of the legislation on compulsory motor liability insurance, due to which the company had to incur significant expenses. However, amendments to the law on compulsory motor liability insurance, adopted in December in the first reading, radically change this situation, so in the future this pressure on the financial results of Rosgosstrakh will be leveled out,” the investment banker predicts.
He assesses the deal as positive not only for the participants, but also for the market as a whole. “There is an obvious trend in the market towards consolidation and enlargement. Realizing this, the shareholders of the two groups decided to combine their efforts and assets. This will increase the level of competition - the scale of the created business will allow it to compete on an equal footing, including with the largest state players.”
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